Freddie Mac 2012 Annual Report Download - page 200

significant estimates, assumptions, and judgments, as described above in “Impairment Recognition on Investments in
Securities.” Any changes in these estimates, assumptions, or judgments in future periods may result in the recognition of an
other-than-temporary impairment, which would result in some of this deferred tax asset not being realized and may have a
material effect on our financial position and results of operations. For more information see “NOTE 12: INCOME TAXES.”
RISK MANAGEMENT AND DISCLOSURE COMMITMENTS
In October 2000, we announced our adoption of a series of commitments designed to enhance market discipline,
liquidity and capital. In September 2005, we entered into a written agreement with FHFA, then OFHEO, that updated these
commitments and set forth a process for implementing them. A copy of the letters between us and OFHEO dated
September 1, 2005 constituting the written agreement has been filed as an exhibit to our Registration Statement on Form 10,
filed with the SEC on July 18, 2008, and is available on the Investor Relations page of our web site at www.freddiemac.com/
investors/sec_filings/index.html.
In November 2008, FHFA suspended our periodic issuance of subordinated debt disclosure commitment during the term
of conservatorship and thereafter until directed otherwise. In March 2009, FHFA suspended the remaining disclosure
commitments under the September 1, 2005 agreement until further notice, except that: (a) FHFA will continue to monitor our
adherence to the substance of the liquidity management and contingency planning commitment through normal supervision
activities; and (b) we will continue to provide interest-rate risk and credit risk disclosures in our periodic public reports.
For disclosures concerning our PMVS and duration gap, see “QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK — Interest-Rate and Other Market Risks — PMVS and Duration Gap.” Our 2012
monthly average PMVS results, duration gap, and related disclosures are provided in our Monthly Volume Summary reports,
which are available on our web site, www.freddiemac.com and in current reports on Form 8-K we file with the SEC. For
disclosures concerning credit risk sensitivity, see “RISK MANAGEMENT — Credit Risk — Mortgage Credit Risk — Credit
Risk Sensitivity.”
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest-Rate Risk and Other Market Risks
Sources of Interest-Rate Risk and Other Market Risks
Our investments in mortgage loans and mortgage-related securities expose us to interest-rate risk and other market risks
arising primarily from the uncertainty as to when borrowers will pay the outstanding principal balance of mortgage loans and
mortgage-related securities, known as prepayment risk, and the resulting potential mismatch between the timing of: (a) our
receipt of cash flows related to our assets; and (b) payment of cash flows related to the liabilities we use to fund those assets.
For the vast majority of our mortgage-related investments, the mortgage borrower has the option to make unscheduled
payments of additional principal or to completely pay off a mortgage loan at any time before its scheduled maturity date
(without having to pay a prepayment penalty) or make principal payments in accordance with their contractual obligation.
We use derivatives as an important part of our strategy to manage interest-rate and prepayment risk. When determining to
use derivatives to mitigate our exposures, we consider a number of factors, including cost, efficiency, exposure to
counterparty risks, and our overall risk management strategy. See “MD&A — RISK MANAGEMENT” and “RISK
FACTORS” for a discussion of our market risk exposures, including those related to derivatives, institutional counterparties,
and other market risks.
Our credit guarantee activities also expose us to interest-rate risk because changes in interest rates can cause fluctuations
in the fair value of our existing credit guarantees. We generally do not hedge these changes in fair value except for interest-
rate exposure related to buy-ups and float. Float, which arises from timing differences between when the borrower makes
principal payments on the loan and the reduction of the PC balance, can lead to significant interest expense if the interest rate
paid to a PC investor is higher than the reinvestment rate earned by the securitization trusts on payments received from
mortgage borrowers and paid to us as trust management income.
The principal types of interest-rate risk and other market risks to which we are exposed are described below.
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